August 23, 2012 / 1:10 PM / 8 years ago

Invoice finance hot again as online exchanges fill bank gap

* Companies head online for funding as banks retreat

* Investors’ invoices returns better than stocks and bonds

* Invoice financing: more than 1 trillion euros last year

By Kylie MacLellan

LONDON, Aug 23 (Reuters) - A new twist on an old way of lending is giving wealthy investors the chance to make profits from money owed to small businesses.

Invoice financing - advancing funds to firms by buying their outstanding sales invoices - is booming as a flurry of new websites provide an online platform for investors to step into a gap left by retreating banks.

New regulations after the financial crisis have forced traditional lenders to cut risky financing and left many small businesses short of funds. Now companies can hook up with wealthy investors who have been struggling to find big returns amid flat interest rates and rocky markets.

“Cash-rich investors are finding it hard to put their money into sound investments. Many businesses need finance that has been withdrawn by the traditional banks,” said the head of one company managing investments for a wealthy family, which is registered with new UK website Platform Black.

“It makes sense to ... let these people work together without the restrictions, costs and lack of flexibility that exist when the banks get involved.”

U.S. site The Receivables Exchange was an early platform, founded in 2007. It says more than $1.5 billion has been funded to small and medium-sized businesses through the exchange since then and more than 2,000 businesses registered.

In Europe the growing popularity of invoice financing has seen the creation of Sweden’s Fakturaborsen and Debitos in Germany as well as two UK websites, Platform Black and MarketInvoice. Some 25 million pounds ($39.5 million) has been advanced through the latter since it was founded 18 months ago.

Last year the invoice finance sector, which includes services such as factoring, invoice discounting and supply chain finance, provided clients with more than 1 trillion euros of funding in Europe alone, according to research by technology and consultancy firm Demica.

HIGH RETURNS

Invoice financers are among a string of alternative lenders which have emerged online, the internet easing both the process of matching up investors with firms and the transfer of money.

Others include peer-to-peer lending and crowdfunding, where members of the public can invest as little as 10 pounds, either as a business loan or in return for a small stake. Money can be locked in for years and with the latter there is no guarantee of a return.

By comparison the invoice auction sites focus on sophisticated investors - MarketInvoice requires them to be able to put in at least 50,000 pounds - who invest for fixed periods of time, usually 30 to 90 days.

Firms auction their invoices and pay an additional fee to investors for boosting the company’s cash flow. The websites charge investors a percentage of their gain and businesses a percentage of the invoice. Some also levy a membership fee.

On MarketInvoice, annualised returns vary between 10 and 24 percent depending on an investor’s portfolio of invoices. Average returns are around 16 percent. I nvestors have made an average of 1.5 to 2 percent per month through Platform Black, which began running auctions in June.

In contrast, the UK’s FTSE All Share index fell around 3.3 percent in the year to the end of July, while the average return on bond funds available in the UK over the same period was just 0.63 percent.

NEW FORMAT

The latest form of invoice financing is more flexible than before, when banks typically required companies to sell all their invoices and pay an ongoing service fee.

By comparison the auction websites let companies pick and choose which invoices to sell, and investors are able to buy partial invoices. The average MarketInvoice auction of 80,000 to 100,000 pounds is typically taken by 2-4 buyers who include hedge funds, asset managers, wealth managers and individuals.

Risk is more transparent, as most of the sites include access to credit data. The process is also more straightforward.

“This is a very efficient way of buying and selling invoices. There is not tonnes of paperwork. I just point and click,” said Anu Choraria, who runs a London-based independent fund and invests her own money through MarketInvoice. She plans to commit around 250,000 pounds within a year.

Returns from invoices have fallen as competition among buyers increases and firms coming back for repeat business can command smaller discounts. But investors expect this to even out as more companies sign up and markets remain volatile.

“I know of many other investors ... who will be considering this new asset class in the coming months, especially as interest rates remain low and may even trend lower,” said one wealthy individual investing through Platform Black.

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